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First passage times of a jump diffusion process

  • S. G. Kou (a1) and Hui Wang (a2)
Abstract

This paper studies the first passage times to flat boundaries for a double exponential jump diffusion process, which consists of a continuous part driven by a Brownian motion and a jump part with jump sizes having a double exponential distribution. Explicit solutions of the Laplace transforms, of both the distribution of the first passage times and the joint distribution of the process and its running maxima, are obtained. Because of the overshoot problems associated with general jump diffusion processes, the double exponential jump diffusion process offers a rare case in which analytical solutions for the first passage times are feasible. In addition, it leads to several interesting probabilistic results. Numerical examples are also given. The finance applications include pricing barrier and lookback options.

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Corresponding author
Postal address: Department of IEOR, Columbia University, New York, NY 10027, USA. Email address: sk75@columbia.edu
∗∗ Postal address: Division of Applied Mathematics, Brown University, Box F, Providence, RI 02912, USA.
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Advances in Applied Probability
  • ISSN: 0001-8678
  • EISSN: 1475-6064
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